Detailed Rationale

CRISIL Ratings has reaffirmed its short-term rating on the certificate of deposit programme of UCO Bank at ‘CRISIL A1+’.

 

The overall rating continues to reflect the expectation of strong support from the Government of India (GoI) and moderate resource profile. These strengths are partially offset by average, albeit improving, asset quality and earnings.

 

The bank reported a total business of Rs 4,50,007 crore as on March 31, 2024, which further grew to Rs 4,61,408 crore on June 30, 2024.

 

Asset quality has also exhibited gradual improvement over the past few quarters – evidenced in gross non-performing assets (NPAs) improving to 3.46% as on March 31, 2024 (3.32% as on June 30, 2024), from 4.78% a year earlier, supported by lower slippages and growth in loan book. Net NPAs have also declined substantially to 0.89% (0.78% as on June 30, 2024) from 1.29% over the same period. As on March 31, 2024, standard restructured advances accounted for 1.9% of the bank advances.

 

Return on average assets (RoA), though range bound, declined to 0.53% in fiscal 2024 from 0.65% for the previous fiscal – on account of higher operating expenditure and moderate rise in credit costs. For Q1 2025, annualised RoA revived to 0.67%.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of UCO Bank and has factored in the strong support that the bank is expected to receive from GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from GoI

The government is expected to continue providing strong support to the bank, both on an ongoing basis and in the event of distress. The bank has high strategic importance to GoI which is its majority shareholder, and also the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, considering the sector’s criticality to the economy, the strong public perception of sovereign backing for PSBs, and adverse implications of any PSB failure, in terms of political fallout, systemic stability, and investor confidence. The majority ownership creates a moral obligation on the government to support PSBs, including UCO Bank.

 

GoI has supported UCO Bank with infusion of Rs 22,645 crore over fiscals 2016-2022. Of this, Rs 2,600 crore was infused in fiscal 2021; consequently, tier 1 and overall capital-to-risk weighted assets ratio (CRAR) were at 11.14% and 13.74%, respectively, as on March 31, 2021. Since then, Tier 1 and CRAR have shown healthy year on year (y-o-y) improvement and were 14.54% and 16.98%, respectively, as on March 31, 2024, aided by improved accruals. As on June 30, 2024, Tier 1 and CRAR were 14.75% and 17.09%, respectively.

 

Moderate resource profile

Total deposits increased by 5.5% y-o-y to Rs 2,63,130 crore as on March 31, 2024 (Rs 2,68,155 crore as on June 30, 2024). Ratio of current account and savings account (CASA) deposits to total deposits was 36.7% as on June 30, 2024, and 37.3% as on March 31, 2024. Of the CASA deposits, saving deposits accounted for 88%, and remaining 12% comprised current deposits. Additionally, cost of deposits inched up to 4.82% in fiscal 2024 from 4.06% in fiscal 2023, while it dipped marginally to 4.79% in the first quarter of this fiscal.

 

The bank is expected to maintain its resource profile, supported by its established market position in eastern India, which has supported its stable deposit franchise over the years.

 

Weakness:

Average, albeit improving, asset quality and profitability

Asset quality remains average, albeit it improved in fiscal 2024 with gross NPAs at 3.46% as on March 31, 2024, (3.32% as on June 30, 2024), as compared with 4.78% a year ago. The improvement was driven by lower slippages of Rs 2,073 crore in fiscal 2024 vis-a-vis Rs 2,097 crore in fiscal 2023 and Rs 6,122 crore in fiscal 2022 (Rs 479 crore in the first three months of fiscal 2025). Slippages to net advances were 1.33% in fiscal 2024 and 1.05%[1] in the three months ended June 30, 2024. Majority of stress in the corporate book is already recognized, and fresh slippage in this segment is expected to be relatively low. As on March 31, 2024, standard restructured advances accounted for 1.9% of the bank portfolio. Net NPAs were 0.89% as on March 31, 2024, (0.78% as on June 30, 2024) from 1.29% a year ago. The bank maintained a healthy provision cover of 77.1% as on June 30, 2024.

 

The strategy to grow more granular assets in the retail, and micro, small and medium enterprise (MSME) segments, and adoption of a conservative approach while lending to corporates, augurs well for the asset quality.

 

Also, the increasing proportion of high-yield retail, agriculture, and MSME segments have resulted in steady improvement in net interest margin to 2.59% in fiscal 2024 (2.75% for the three months ended June 30, 2024) from 2.58% in fiscal 2023. Profitability has further benefited from controlled credit cost of 0.64% for fiscal 2024 which, though mildly higher than 0.51% for the previous fiscal, is lower than 1.17% for fiscal 2022. RoA was 0.53% in fiscal 2024, and 0.65% in fiscal 2023, and net profit was Rs 1,654 crore compared to Rs 1,862 crore, for the same comparable period. The marginal decline in RoA in fiscal 2024 can be attributed to slightly higher operating expenses and credit costs incurred during the year. For three months ended June 30, 2024, net profit was Rs 551 crore (annualised RoA 0.67%).

 

While asset quality has stablised in the last few quarters, the ability to manage collections and control credit costs, particularly that from the restructured book, and sustain improvement in profitability - will remain key monitorables.

[1]Annualised, Slippage ratio= Slippages in Q1FY25/ Net Advances as on March 31, 2024

Liquidity: Strong

Liquidity remains supported by the strong retail deposit base. The liquidity coverage ratio stood at 152% as on March 31, 2024, and was higher than the regulatory requirement. The excess statutory liquidity stood at Rs 19,663 crore (around 7.4% of net demand and time liabilities) as on March 31, 2024. Liquidity benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the Reserve Bank of India and call money market.

 

ESG profile

CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of UCO Bank supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

UCO Bank has an ongoing focus on strengthening the various aspects of its ESG profile.

 

Key ESG highlights of UCO Bank:

• ESG disclosures of the bank are evolving, and it is in the process of further strengthening the disclosures going forward.
• The bank has started focusing on paperless banking and has a policy of not lending to industries consuming / producing Ozone Depleting Substance (ODS)
• As on March 31, 2023, around 28.33% of the bank’s total workforce comprised women employees, and it has taken initiatives to promote gender equality within the organisation.
• Of the board members, 50% are independent directors with none of them having a tenure exceeding 10 years. The bank also has a dedicated investor grievance redressal mechanism.

 

There is growing importance of ESG among investors and lenders. The commitment of UCO Bank to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic capital markets

Rating Sensitivity Factors

Downward Factors

• Material reduction in shareholding and/or expectation of support from GoI
• Decline in the capital adequacy ratio (CAR) to below minimum regulatory requirements (including capital conservation buffer, which is tier I of 9.5% and overall CAR of 11.5%)
• Continuous losses and sustained deterioration in asset quality

About the Bank

UCO Bank was founded in 1943 as United Commercial Bank. It was renamed as UCO Bank by an Act of Parliament in 1985. In 2003, the bank made its initial public offering, resulting in dilution of government ownership. GoI owned 95.39% stake in the bank as on June 30, 2024. As on June 30, 2024, the bank had total advances and deposits of Rs 1,93,253 crore and Rs 2,68,155 crore, respectively.

 

Profit after tax (PAT) was Rs 1,654 crore and total income (net of interest expenses) was Rs 11,366 crore in fiscal 2024, as against a net profit of Rs 1,862 crore and total income (net of interest expenses) of Rs 9,852 crore for fiscal 2023.

Key Financial Indicators

Particulars	Unit	FY24	FY23
Total assets	Rs crore	3,23,691	3,00,863
Total income (net of interest expense)	Rs crore	11,366	9,852
PAT	Rs crore	1,654	1,862
Gross NPA	%	3.46	4.78
Overall capital adequacy ratio	%	16.98	16.51
Return on assets*	%	0.53	0.65

 

Particulars	Unit	Q1FY25	Q1FY24
Total assets	Rs crore	3,31,671	3,04,474
Total income (net of interest expense)	Rs crore	3,089	2,642
PAT	Rs crore	551	223
Gross NPA	%	3.32	4.48
Overall capital adequacy ratio	%	17.09	16.85
Return on assets*	%	0.67	0.30

*annualised

Any other information: Not Applicable